How do I Budget for a Car Payment?

Jeremy Laukkonen

Budgeting for a car payment can depend on a variety of factors, such as your credit history and whether you are going to buy or lease. Credit history can affect the interest rate you will be able to get on a car loan. If you are going to buy a car, the interest rate may also be affected by the length of your loan and which financial institution you get it from. Lease payments will depend largely on where you are leasing your vehicle from. In either case, a car payment calculator may help you determine how much you will need to budget for each month.

Newer cars may have a larger monthly payment.
Newer cars may have a larger monthly payment.

If you are planning on buying a car, your budgeting process will typically begin with speaking to the lending institution of your choice. This can be your bank or credit union, or you can contact a number of institutions to find the best available interest rate. The term of the loan can also affect the monthly payment. A car loan is typically three to five years in length. A shorter loan will have higher monthly payments, and a longer loan may cost more over the duration.

A car dealership may offer financing, but the interest rate might be steep.
A car dealership may offer financing, but the interest rate might be steep.

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Once you have determined your probable interest rate, the amount you qualify for, and how long you will take to repay, you may want to look at your finances to determine how much money you will have available each month. You can then feed your interest rate and the amount you can spend each month into a car payment calculator to determine how expensive a vehicle you can afford. This can let you budget for your new car payment before you ever set foot on a dealership lot.

The interest rates for car loans vary substantially depending on the borrower's credit record.
The interest rates for car loans vary substantially depending on the borrower's credit record.

Dealerships will sometimes offer to secure financing, though the interest rate offered may not be your best choice. It is typically the most convenient option, and if you have very good credit you may get a competitive interest rate without needing to spend a great deal of your time speaking to lending institutions. This may make it difficult to budget your car payment in advance unless a dealership is willing to work with you ahead of time.

Budgeting for a leased vehicle will tend to be a similar process, but may have a few differences. You will probably still want to examine your finances to determine how much you can afford each month, and you may be able to use that with a car payment calculator to see how expensive of a vehicle you can lease. When leasing a car, the dealership will typically investigate a great number of lending options, so you may not know the final payment until you actually speak with them.

A person should know their budget before setting foot on a new car lot.
A person should know their budget before setting foot on a new car lot.

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